Price and market trends: Argentina peso plunge roils plastics market

31 January 2014 10:02[Source: ICB]

A percentage plunge in the currency relative to the US dollar has plastics players scrambling

The Argentine peso fell to 7.75 versus the US dollar on 23 January, marking a decline of 12% in the past two days in the currency’s worst performance since the aftermath of the country’s 2001 economic crisis.

Another devaluation is at hand

Copyright: Central Bank of Argentina

The steep devaluation of the peso has participants in the plastics market scrambling to interpret the news, aiming to develop a strategy to protect themselves from the potential changes that will likely ensue.

Producers were having internal meetings to discuss the situation and, for the most part, did not have any answers. The typical response on 23 January was: “We only know what the media is reporting. We hope to have an answer and a strategy in place in the next 24 hours, but it will depend on how the situation develops”.

Transformers are having similar problems. They wonder if their credit terms will remain unchanged or perhaps will be shortened to 15 days, cash only. Currently, the typical term is 60 days.

Companies wonder whether import permits will still be issued at the typical pace. The import permits are intended to preserve the country’s reserves of US dollars.

Sellers of imported product debate the feasibility of conducting transactions in local currency and ponder the possibility of setting prices in dollars to protect themselves. Those who can transfer extra costs downstream will try to do so, but the question remains whether the final consumer will respond to steep price increases.

Much of the uncertainty comes from guessing the next move of Argentina’s Central Bank. The dollar has floated freely in the last two days. It is unclear whether this policy of non-intervention will continue.

Some sources said that polyvinyl chloride (PVC) resin sales have been suspended until the currency situation is clarified. When sales are resumed, payment terms will be shortened to a maximum of 15 days to maintain transactions in Argentine pesos, according to local industry participants. Otherwise, payments will be adjusted to the exchange rate on the payment due date, the sources added.

Contributing to the absence of clarity in the plastics resins ­markets in Argentina, other sources suggested that resin sales could not be suspended, because market participants are concerned about government oversight. Although there is no official government control on sales prices, sellers might feel obligated to sell raw material as long as product is available.

ENERGY COSTSQuestions also surround domestic energy costs; whether the government will absorb the extra cost of imports without raising domestic tariffs for fuel, gas and electricity; and what the impact will be on inflation, already estimated to be above 20%.

One immediate effect seen in many sectors is a stop on deliveries of resins. Sellers would like to make sure they are selling at prices that will allow them to replenish stocks. Some have made deliveries on 22 and 23 January but wonder if that was the right decision.

On 22 January, the peso closed at 7.14 to the dollar, down 3.7% from 21 January’s 6.885, according to the Banco de la Nacion Argentina. At the start of the year, the peso was at 6.56 to the dollar.

The performance of the peso is the worst since March 2002, which immediately followed the country’s economic crisis of 2001, according to the newspaper La Nacion.

The weakening of the official exchange rate was mirrored by that of the blue dollar, what Argentina calls its informal rate. The blue dollar fell 7.49% to pesos (Ps) 13.06 on 23 January, according to the business newspaper Ambito Financiero. At the start of the year, it was at Ps10.30. The weakening peso comes as Argentina continues to rely heavily on imports of energy, which it buys in US dollars.

Consumption has increased because the country is in the midst of a hot summer, with temperatures reaching 37 degrees Celsius (99 degrees Fahrenheit). Humidity makes the weather feel like 47 degrees, according to Ambito Financiero.